On 16 September 2011 the Netherlands Supreme Court rendered an important judgment regarding the exercise by a bank of its right to reverse a direct debit (LJN BQ873 SNS Bank/Pasman q.q.). In light of this judgment it can be concluded that, in principle, a bank may exercise its right of reversal not only if the direct debit caused the account to be overdrawn or (if an overdraft facility has been granted) the limit to be exceeded, but also if the bank will, as a result of the debtor/payer's bankruptcy, be unable to recover the claim resulting from the direct debit. This is only otherwise in the event of exceptional circumstances.
The facts of the case
SNS Bank had provided Vetrans with an overdraft facility. A few days before Vetrans was declared bankrupt, funds were debited from its account at SNS Bank by direct debits initiated by the payee. The debits increased the debit balance but did not, however, cause the overdraft limit to be exceeded. After the bankruptcy order, SNS Bank exercised its right to reverse the relevant direct debits within the applicable reversal period. This reduced the debit balance on Vetrans' account.
The bankruptcy trustee brought an action against SNS Bank for the amount of the direct debit reversals. The trustee argued, firstly, that the reversals constituted post-bankruptcy repayments effected through giro-based funds transfers and that these repayments gave rise to claims of the bank against Vetrans. Because these claims arose after Vetrans' bankruptcy, the bank was prohibited from setting them off against Vetrans' debt to the bank under the overdraft facility (Section 53 Bankruptcy Act). The bankruptcy trustee argued, secondly, that the bank had committed a tortious act in exercising its reversal right and was therefore liable for damages, since the direct debits did not cause the overdraft limit to be exceeded.
The Supreme Court judgment
Legal characterisation of reversals
In a case decided on 3 December 2004 (Mendel q.q./ABN AMRO NJ 2005, 200), the Netherlands Supreme Court had held that a reversal of a direct debit-based giro transfer did not constitute a repayment in the legal sense, but was merely an administrative correction. The reversal therefore did not result in a claim of the bank against the debtor/payer and the stage of set-off was consequently never reached. The dispute in that case concerned the crediting of the payee's account. The Supreme Court held that, under the applicable general terms and conditions, such crediting was conditioned on the direct debit not being reversed. The SNS Bank/Pasman case concerned the debiting of the debtor/payer's account. The applicable version of the general terms and conditions for direct debits provided that the crediting of the payee' s account was conditioned on the direct debit not being reversed, but did not contain a similar provision with regard to the debiting of the debtor/payer's account. The Supreme Court – not surprisingly – held that the debiting was nevertheless also conditioned on the direct debit not being reversed.
Was the bank' s exercise of its reversal right tortious?
The Supreme Court held that, under the applicable general terms and conditions, the bank was entitled to reverse a direct debit if the debit resulted in a claim by the bank on the debtor/payer that it would be unable to recover as a result of the debtor/payer's bankruptcy. According to the Supreme Court, the reversal right was formulated generally and was not limited to situations in which the debit caused the overdraft limit to be exceeded. A bank is, in principle, entitled to exercise its reversal right to protect its own interests. In exceptional circumstances, however, the exercise by a bank of its reversal right can constitute an abuse of that right, in which event the reversal can be successfully challenged.
Consequences for banks in practice
The judgment means that in the event of a direct debit, a bank is – in principle – entitled to limit its exposure vis-à-vis the debtor/payer by reversing that debit within the applicable period. With regard to abuse of the right of reversal, the requirement imposed by the Supreme Court that there be exceptional circumstances indicates that the criterion is to be applied with restraint. It at any rate follows from the judgment that the mere fact that the debtor/payer has been declared bankrupt is an insufficient basis for the conclusion that the bank has abused its reversal rights. It also follows from the judgment that the fact that the direct debit did not result in an overdraft above the agreed limit is, likewise, an insufficient basis for such a conclusion. It is possible that what the Supreme Court means by exceptional circumstances are, for example, situations in which the bank has enough collateral from which to recover its claim against the debtor/payer.